End of Year Valuation

[Guest Marino13]

I have a plan with a valuation date of 2/28/2002 (an end of year valuation). What 415 $ limit would I use for this plan, the 2001 = $140,000 or the 2002 $160,000?

[MGB]

What does the plan document say?

What does the enrolled actuary say (they are the one signing off on the appropriateness of any calculations)?

[Blinky the 3-eyed Fish]

Dan, although it is a component of the funding method, generally, for an end of the year valuation the actuary would recognize the dollar limit in effect on that date.

In this case, where there is the change in the dollar limit due to EGTRRA, there is another wrinkle. While the EGTRRA increase in the dollar limit is in effect for plan years ending in 2002, the plan document either - references the 415 limit and automatically increases or it does not reference the 415 limit and would require an amendment to increase the 415 limit. The same principal applies to the 401(a)(17) limits.

In your case you cannot recognize the EGTRRA increase unless your document says so already because you are already past the 2 1/2 months after the plan year end and too late to do an amendment.

So, in summary, it's what MGB said.

[mwyatt]

And another wrinkle; EGTRRA accelerated date of implementation of 415 changes for DB plans (I guess the rational is that in the end it wouldn't cost anything from a revenue standpoint as the acceleration created an additional year of funding the increase) but remember that the $200,000 comp limit increase only takes effect in the year beginning in 2002. Same caveats are in order as far as document language governing 415 increases (for the most part, documents cover this by reference starting with the TRA '86 restatements).

Also, assume your same valuation for the year ended 2/28/2002 was performed as of the beginning of year (ie, 3/1/2001). Although the valuation date preceded the 5/2001 signing of EGTRRA, the increased 415 limit would come into play also with a beginning of year valuation.

[Blinky the 3-eyed Fish]

Mwyatt, two things: one, I have yet to see a volume submitter plan reference the 415 limits; two, the recognition of the 415 limit is a component of the funding method. While I have seen beginning of the year valuations recognize the end of the year 415 limit, I have seen more often, and agree with, the use of the 415 limit in effect on the valuation date. To me it coincides with the notion that the actuary has no knowledge past the valuation date (with minor exceptions).

[Mike Preston]

Count me as one that universally uses the limit in effect at the end of the valuation period, not the beginning. I may have used the rate in effect on the valuation date for a BOY val in a smattering of cases, but it is by far the exception.

None of this is meant to argue with the basic premise that it is a part of the funding method.

[mwyatt]

Blinky & Mike:

I agree wholeheartedly with you with regards to normal situations vis a vis non-calendar year valuations (i.e., consider the plan year 2/1/2000-1/31/2001: if boy, use $ limit for 2000, and $ limit for 2001 for eoy). However, EGTRRA explicitly stated that the accelerated effective date of changes applied to plan years ending in 2002. This is a little different than our past practices (and past implementation of IRS improvements - or for anyone doing this since pre TEFRA unimprovements).

As far as the VS references, we've been using the Corbel/Relius/Sungard/next biggest fish for over 20 years, and 415 limits are incorporated by reference since TRA '86. Otherwise, we all should have been amending our document each year for cost of living increases.

And Blinky: that was the most frustrating thing about the EGTRRA increases for our non-calendar year clients. All of a sudden benefits were increasing for our clients regardless of whether we wanted them to or not (as my old prof Charles Kindleberger used to say, sometimes you can kill the kitty with too much cream).

[Mike Preston]

mwyatt, I'm not sure we are on the same wavelength. First, I was saying that I do not use the limit in place at the BOY, even if I'm doing a BOY val. Except in a very few cases I can remember over the years.

Second, my definition of incorporation by reference does not mean that the limit increases automatically with cost of living. Those are two entirely different things. Yes, the Corbel, etc. docs include automatic cost of living increases, but they do not incorporate the rest of 415 by reference. If you interpreted those docs as automatically incorporating the increased limits of EGTRRA, I'm afraid you've got some non-deductible contributions hiding in a closet somewhere.

Unless, of course, your VS docs are different from those I've seen elsewhere by the various-sized marine life.

On the bright side, you have some really cool credit balances, too. (g, d & r)

[mwyatt]

Hey Mike:

Sorry about the previous message's unclarity (the danger of late night posts when writing on the East Coast after a night out on the town.). I guess what I was getting at with my comment WRT EGTRRA changes was the fact that for non-calendar years, you had accelerated adoption of the new 415 changes (i.e., the reference to effective date being plan year ending in 2002, rather than beginning in 2002). Assuming your client did the appropriate EGTRRA amendment, then a 2/1/2001 valuation would be subject to the EGTRRA limits in the year beginning 2001. We had all of our clients adopting EGTRRA changes in 2001 in this circumstance adopt the changes prior to doing the val.

My question, without getting into the mechanics/legalities of how you actually use the new limits, was why the acceleration of the DB 415 changes in EGTRRA were made. My gut feeling was that in the end, no additional benefit would be granted to ongoing participants (since the changes would come in eventually) so that in actuality revenue loss would be less to the government since an additional year would be allowed to fund the increases in benefits for non-calendar year plans.

I'm a little surprised to hear that you are using the EOY limits for BOY valuations of non-calendar year plan. From a practical standpoint, consider a 2/1-1/31 plan year. Since limits for the next year aren't even released until late fall of the current year (and before they made the change from 4Q to 3Q COLAs, not even until after the year end), are you saying that you hold off on doing any of these valuations until almost the close of the year? (I was always under the impression over the years that your valuation should reflect the dollar limit in effect at the time that you were performing the valuation).

[MGB]

You can never anticipate increases in the 415 limit beyond the valuation date. It is not permissible to use an end of year limit for a beginning of year valuation.

[MGB]

To clarify, I meant to say that you cannot "fully" recognize the limit at the end of year. The change in limit during the year is technically a plan amendment. Even though it is retroactive to the beginning of the year, you cannot fully recognize an amendment that occurs during the year (see Revenue Ruling 77-2). You may only do one of two things (consistently as part of the funding method): Recognize it pro rata for the portion of the year it is in effect, or not recognize it at all.

[Mike Preston]

MGB: Your statement is not true. Is this another of those things that the IRS has continually stated at conferences that is acceptable, but that some citation exists which purports to say the opposite? I agree that there is certainly nothing wrong with not using the EOY limit, other than potentially underfunding a plan, which can be kind of critical in the last year of a plan!

[Mike Preston]

mwyatt: Yes, the vals are performed only after the increase is known, typically. Sometimes they are performed on an estimated basis before they are known, but the Sch. B is completed using the val performed after the increase is known.

Why did EGTRRA implement the DB increases one limitation year prior to the DC increases for non-calendar year limitation years? I don't know.

[Guest DFerrare]

MGB:

I believe Rev. Ruling 81-215 provides an exception to 77-2 and allows for the full end of year maximum to be funded for a non-calendar year plan.

David

[MGB]

DFerrare: I agree, I haven't read that in 20 years and forgot about this exception (I've never had any reason to use it myself as I've never worked with small plans and rarely anything other than calendar year).

Mike Preston: I know why they did it. In the Senate version of the bill, it had a schedule of dollar amounts for the next five years, rather than a single change like the final version had. However, the language stated the limits applied to "tax years" ending in 200X, etc. When the House and Senate versions went to conference committee, I noticed this language and realized this would cause problems and override the regulations on being able to use the amount in effect at the end of the limitation year. I contacted the conference committee staffers and requested a change in the language (this was during the round-the-clock 48-hour flurry trying to reconcile the two bills between the conference starting and ending; typically this process takes weeks or months for such a large bill). Although I got them to drop the term "tax" and leave it as just "years", the "ending in" remained and should not have. (The reference to just "years" is sufficient because that is how the law already reads. The concept of a limitation year and being able to use the limit in effect in the "year" that the limitation year ends is purely in the regulations and should not have been addressed in the new law.) The next day, they dismissed the scheduled increases and went with one single initial increase. On the following day, it was conveyed to me that the difference between the DB language and the DC language was purely a drafting error in the rush and they intended both to have the same language.

[AndyH]

Is there a "final answer" to the original question that someone would be so kind as to summarize?

[MGB]

I think the final answer is still the original answer I gave: What does the document say?

[AndyH]

Why would the document stipulate what limit can be used for funding purposes?

I think I've typically seen the limits prorated for an end of year val. That certainly wouldn't be something addressed in the document.

Clearly there are a couple of options, and it makes sense that such choice would be part of the funding method. I'm simply asking which if any options have been ruled out in the earlier discussions.

[Mike Preston]

OP asked: I have a plan with a valuation date of 2/28/2002 (an end of year valuation). What 415 $ limit would I use for this plan, the 2001 = $140,000 or the 2002 $160,000?

1. Document amended to incorporate EGTRRA limits by 5/15/02: $160,000.

2. Document not amended to incorporate EGTRRA limits, document does not incorporate Section 415 by reference (note: irrelevant whether document incorporates COLA by reference, as the EGTRRA change did not change the COLA, just the base): $140,000.

3. Document not amended to incorporate EGTRRA limits, as document DOES incorporate Section 415 by reference, plan not amended before 5/15/02 to eliminate pop-up, per IRS announcement that one can eliminate the pop-up with an amendment adopted before 6/30/2002, but for funding purposes, amendment not adopted by 412©(8) deadline ignored for funding purposes: $160,000. [Note: I haven't re-checked this point, and it is an interesting one, but I presume that 412©(8) still controls, even though the 411d6 protection was eliminated for amendments adopted through 6/30/2002. Can somebody verify that the dates don't change just because it isn't a calendar year plan?]

4 Document not ameded to incorporate EGTRRA limits, as document DOES incorporate Section 415 by reference, plan IS amended before 5/15/02 to eliminate pop-up: $140,000.

Any other options I left out?

[MGB]

You are correct in (3), the 6/30/02 date was a fixed date. So, you end up funding for one year at 160,000, but the person can be cut back after the fact to 140,000.